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Federal Register / Vol. 74, No. 102 / Friday, May 29, 2009 / Rules and Regulations

and process by which Ontario will make
available EDLs to qualified Canadian
citizens residing in the Province of
Ontario. On May 11, 2009, CBP
determined that, contingent upon
successful technical testing, Ontario
EDL’s produced in accordance with the
Province of Ontario’s business plan
were anticipated to be designated as
documents denoting identity and
Canadian citizenship for purposes of
entering the United States by land or
sea.
Following successful field and
technical testing, the Commissioner of
CBP has determined that the EDLs
issued by the Province of Ontario
according to the terms of the business
plan approved by CBP meet the
requirements of section 7209 of the
IRTPA and are acceptable documents to
denote identity and Canadian
citizenship for purposes of entering the
United States at land and sea ports of
entry from within the Western
Hemisphere under the final rule.
Designation
This notice announces that the
Commissioner of CBP has designated
the EDLs issued by the States of
Vermont and Michigan and the
Provinces of Quebec, Manitoba, British
Columbia, and Ontario as acceptable
documents to denote identity and
citizenship for purposes of entering the
United States at land and sea ports of
entry from within the Western
Hemisphere, pursuant to section 7209 of
IRTPA and the final rule, 8 CFR 235.1(d)
Dated: May 20, 2009.
Jayson P. Ahern,
Acting Commissioner, Customs and Border
Protection.
[FR Doc. E9–12513 Filed 5–28–09; 8:45 am]
BILLING CODE 9111–14–P

FEDERAL RESERVE SYSTEM
12 CFR Part 204
[Regulation D; Docket Nos. R–1334 and
R–1350]

Reserve Requirements for Depository
Institutions

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AGENCY: Board of Governors of the
Federal Reserve System.
ACTION: Final rule.
SUMMARY: The Board is adopting, with
certain revisions, its interim final rule
that amended Regulation D (Reserve
Requirements of Depository Institutions)
to direct Federal Reserve Banks to pay
interest on certain balances held at
Federal Reserve Banks by or on behalf

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of certain depository institutions. The
Board is also amending Regulation D to
authorize the establishment of limitedpurpose accounts, called ‘‘excess
balance accounts,’’ at Federal Reserve
Banks for the maintenance of excess
balances of eligible institutions. These
excess balance accounts are intended to
permit eligible institutions to earn
interest on their excess balances without
significantly disrupting established
business relationships with their
correspondents.
DATES:

This final rule is effective July 2,

2009.
FOR FURTHER INFORMATION CONTACT:
Sophia H. Allison, Senior Counsel (202/
452–3565), or Dena L. Milligan,
Attorney (202/452–3900), Legal
Division, or Seth Carpenter, Deputy
Associate Director (202/452–2385), or
Margaret Gillis DeBoer, Section Chief
(202/452–3139), Division of Monetary
Affairs; for information with respect to
the clearing balance policy and float
calculations, contact Jonathan Mueller,
Senior Financial Analyst (202/530–
6291), Division of Reserve Bank
Operations and Payment Systems; for
users of Telecommunications Device for
the Deaf (TDD) only, contact 202/263–
4869; Board of Governors of the Federal
Reserve System, 20th and C Streets,
NW., Washington, DC 20551.
SUPPLEMENTARY INFORMATION:

I. Interest on Balances at Federal
Reserve Banks
A. Background
For monetary policy purposes, section
19 of the Federal Reserve Act (‘‘the
Act’’) imposes reserve requirements on
certain types of deposits and other
liabilities of depository institutions.
Title II of the Financial Services
Regulatory Relief Act of 2006 (the ‘‘2006
Act’’) (Pub. L. 109–351, 120 Stat. 1966
(Oct. 13, 2006)) amended section 19 of
the Act by authorizing the Federal
Reserve Banks (‘‘Reserve Banks’’) to pay
earnings on balances maintained at the
Reserve Banks by or on behalf of certain
depository institutions. The original
effective date of this authority was
October 1, 2011. Section 128 of the
Emergency Economic Stabilization Act
of 2008 (the ‘‘2008 Act’’) (Pub. L. 110–
343, 122 Stat. 3765 (Oct. 3, 2008))
accelerated the effective date of this
authority to October 1, 2008.
Section 19 of the Act now provides
that Reserve Banks may pay earnings on
balances held at the Reserve Banks by
or on behalf of certain depository
institutions at least once each quarter at
a rate not to exceed the general level of
short-term interest rates. Depository

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institutions that are eligible to receive
earnings on their balances held at
Reserve Banks include the institutions
described in section 19(b)(1)(A) of the
Act 1 and ‘‘any trust company,
corporation organized under section
25A or having an agreement with the
Board under section 25, or any branch
or agency of a foreign bank (as defined
in section 1(b) of the International
Banking Act of 1978).’’ 2 The Act also
provides that the Board may prescribe
regulations concerning the payment of
earnings, the distribution of earnings to
the depository institutions that maintain
balances or on whose behalf balances
are maintained, and ‘‘the
responsibilities of depository
institutions, Federal Home Loan Banks,
and the National Credit Union
Administration Central Liquidity
Facility with respect to the crediting
and distribution of earnings attributable
to balances maintained * * * in a
Federal Reserve bank by any such entity
on behalf of depository institutions.’’ 3
Regulation D, which implements the
provisions of section 19 of the Act, also
provides that a depository institution
must maintain its required reserves in
the form of cash in its vault, or if vault
cash is insufficient, in the form of a
balance in an account at a Reserve
Bank.4 A depository institution may
maintain balances at a Reserve Bank in
an account in its own name, or it may
choose another institution as its ‘‘passthrough correspondent.’’ 5 Under a
1 Section 19(b)(1)(A) defines ‘‘depository
institution’’ as ‘‘(i) any insured bank as defined in
section 3 of the Federal Deposit Insurance Act or
any bank which is eligible to make application to
become an insured bank under section 5 of such
Act; (ii) any mutual savings bank as defined in
section 3 of the Federal Deposit Insurance Act or
any bank which is eligible to make application to
become an insured bank under section 5 of such
Act; (iii) any savings bank as defined in section 3
of the Federal Deposit Insurance Act or any bank
which is eligible to make application to become an
insured bank under section 5 of such Act; (iv) any
insured credit union as defined in section 101 of
the Federal Credit Union Act or any credit union
which is eligible to make application to become an
insured credit union pursuant to section 201 of
such Act; (v) any member as defined in section 2
of the Federal Home Loan Bank Act; [and] (vi) any
savings association (as defined in section 3 of the
Federal Deposit Insurance Act) which is an insured
depository institution (as defined in such Act) or is
eligible to apply to become an insured depository
institution under the Federal Deposit Insurance
Act.’’ 12 U.S.C. 461(b)(1)(A).
2 Federal Reserve Act section 19(b)(12)(C), 12
U.S.C. 461(b)(12)(C).
3 Federal Reserve Act section 19(b)(12), 12 U.S.C.
461(b)(12).
4 12 CFR 204.5(a)(1) (formerly 12 CFR
204.3(b)(1)).
5 The 2006 Act amended section 19 of the Act to
authorize member banks to enter into pass-through
account arrangements. Prior to the 2006 Act, only
nonmember banks were authorized to enter into
such arrangements. As published in today’s Federal

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‘‘pass-through correspondent’’
arrangement, the pass-through
correspondent holds its respondent’s
required reserve balances in the
correspondent’s account at a Reserve
Bank. The pass-through correspondent
is responsible for holding sufficient
balances in its account at the Reserve
Bank to satisfy its own reserve balance
requirement (if any), its own contractual
clearing balance (if any), and the
aggregate reserve balance requirements
of its respondents. The Reserve Bank’s
debtor-creditor relationship is solely
with the pass-through correspondent
and not with any of the correspondent’s
respondents. Accordingly, Regulation D
provides that the balance in a passthrough correspondent’s account at a
Reserve Bank represents a liability of
the Reserve Bank solely to the
correspondent, notwithstanding the fact
that part or all of that balance may
represent the funds of the
correspondent’s respondents.6
Consequently, a pass-through
correspondent must show the entire
balance in its Reserve Bank account on
the correspondent’s own balance sheet
as an asset, even if the balance consists,
in whole or in part, of amounts that are
passed through on behalf of a
respondent.7

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B. Interim Final Rule on Payment of
Interest on Balances at Federal Reserve
Banks
On October 9, 2008, the Board
published an interim final rule
amending Regulation D to direct the
Reserve Banks to pay interest on
balances held at Reserve Banks to satisfy
reserve requirements (‘‘required reserve
balances’’) and balances held in excess
of required reserve balances and
clearing balances (‘‘excess balances’’)
(73 FR 5948 (Oct. 9, 2008)). The interim
final rule directed Reserve Banks to pay
interest on such balances held by or on
behalf of ‘‘eligible institutions.’’ The
interim final rule defined the new term
‘‘eligible institution’’ to mean an
institution eligible to earn interest on
balances held at the Federal Reserve
Banks under the 2006 Act.
The interim final rule provided that
Reserve Banks would pay interest on
required reserve balances at a rate equal
to the average targeted federal funds rate
over the reserve maintenance period
Register, the Board is also amending Regulation D
to conform the regulation to the 2006 Act.
6 12 CFR 204.5(d)(3) (formerly 12 CFR 204.3(i)(2)).
7 Similarly, a correspondent that is not acting in
a pass-through capacity must also show its entire
account balance at the Reserve Bank as an asset on
its own balance sheet. Regulation D, however, does
not specifically address correspondents other than
pass-through correspondents.

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less 10 basis points and that Reserve
Banks would pay interest on excess
balances at a rate equal to the lowest
targeted federal funds rate during the
maintenance period less 75 basis points.
Since publishing the interim final rule,
the Board has adjusted the method for
determining the rate of interest on
excess balances three times (73 FR
65506 (Nov. 4, 2008), 73 FR 67713 (Nov.
17, 2008), 73 FR 78616 (Dec. 23, 2008))
and the method for determining the rate
of interest on required reserves balances
twice (73 FR 67713 (Nov. 17, 2008), 73
FR 78616 (Dec. 23, 2008)). Currently,
the rate of interest on both required
reserve balances and excess balances is
1⁄4 percent.8 Additionally, in its
December amendments, the Board
amended the regulation to specify that
it may from time to time determine any
other rate for payment of interest on
required reserve balances and excess
balances.
The interim final rule deemed any
excess balance held by a pass-through
correspondent in the correspondent’s
account, when the correspondent was
not itself an eligible institution, to be
held on behalf of the pass-through
correspondent’s respondents. Further,
the interim final rule permitted, but did
not require, pass-through
correspondents to pass back to their
respondents the interest paid on
balances held on behalf of respondents.
The interim final rule also provided that
when a pass-through correspondent
passes back interest to its respondents,
such a payment is not a payment of
interest on a demand deposit for
purposes of Regulation Q (12 CFR part
217). The interim final rule also defined
the new terms used therein.
C. Request for Public Comment and
Summary of Comments
The Board requested comment on all
aspects of the interim final rule. In
response, the Board received 19
comments, consisting of comments from
eight depository institutions, four
financial institution trade associations,
two research organizations, and five
individuals. Two commenters fully
supported the interim final rule, but
made suggestions regarding other
aspects of Regulation D. Six commenters
expressed concerns about the potential
adverse impact of the interim final rule
on correspondent-respondent
relationships. Other commenters
expressed monetary policy concerns
related to paying interest on balances.
8 12

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D. General Comments and Analysis
Two commenters supported paying
interest on balances held at the Reserve
Banks by or on behalf of eligible
institutions as a monetary policy tool.
One commenter noted that payment of
interest on balances at Reserve Banks
provides depository institutions with ‘‘a
reasonable option [for] needed
liquidity.’’ In contrast, six commenters
stated that paying interest on excess
balances encouraged banks to remove
funds from the federal funds market,
and thus, reduced inter-bank lending
and liquidity. One commenter suggested
that, in order to avoid negative effects
on liquidity, the Federal Reserve should
pay interest on required reserve
balances, but not on excess balances.
One commenter stated that paying
interest on excess balances could
encourage financial institutions to
neglect other markets where those
institutions could obtain higher returns.
The Board also received one comment
on market conditions in general, but not
specifically related to paying interest on
balances held at the Reserve Banks.
The Board has carefully considered
the comments about the effects of
paying interest on balances at Reserve
Banks. In the past, the absence of
interest payments on required reserve
balances acted as a tax on depository
institutions’ issuance of deposits subject
to reserve requirements. To the extent
that depository institutions could not
satisfy reserve requirements with vault
cash, they were required to hold more
balances than they otherwise would in
a non-interest bearing account at a
Reserve Bank. Further, the absence of
interest payments on excess balances
meant that, when reserve supply
significantly exceeds demand, the
federal funds rate could fall to as low as
zero.
The Board continues to believe that
the ability to pay interest on balances
held at Reserve Banks promotes
efficiency and stability of the banking
sector. Paying interest on required
reserve balances also eliminates much
of the implicit reserve tax and lessens
the incentives for depository
institutions to engage in reserveavoidance behavior, which absorbs real
resources and diminishes the efficiency
of the banking system. By paying
interest on excess balances, the Federal
Reserve can expand its balance sheet as
necessary to provide sufficient liquidity
to support financial stability while
implementing monetary policy that is
appropriate in light of macroeconomic
objectives of maximum employment
and price stability.

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In order to help foster trading in the
federal funds market, the Board has
made adjustments to the rates at which
the Reserve Banks pay interest on
required reserve balances and excess
balances, and will continue to evaluate,
and make any necessary adjustments to,
the appropriate rate in light of evolving
market conditions. Accordingly, the
Board has determined that the Reserve
Banks will continue to pay interest on
required reserve and excess balances
held at Reserve Banks by or on behalf
of eligible institutions.
One commenter expressed concern
that under the interim final rule, excess
balances held by a correspondent on
behalf of respondents ‘‘would become
demand deposits on the correspondent’s
balance sheet,’’ and thus the
correspondent would be required to
hold reserves against those balances.
Prior to the implementation of the
interim final rule, a correspondent was
required to hold reserves against any
respondent excess funds held as a
deposit subject to immediate
withdrawal by the respondent. The
implementation of paying interest on
balances at Reserve Banks has not
changed the accounting and reporting
treatment of such balances for purposes
of reserve requirements.
The remaining comments concerned
reserve requirements generally, limits
on transfers from savings deposit
accounts, and member-bank passthrough arrangements. Two comments
addressed Regulation D’s limitation on
certain convenient transfers from
savings deposits: One comment
suggested broadening the definition of
‘‘in person’’ transfer, while the other
comment suggested removing the
numeric limitations on certain
convenient transfers from savings
deposits. One commenter recommended
eliminating reserve requirements, while
another commenter recommended
increasing reserve requirements ratios.
The Board is not exercising its
authority at this time to eliminate
reserve requirements or to change any
required reserve ratios at this time, even
though the 2008 Act made both
authorities effective in 2008. The Board
may consider such changes in the future
in the context of a broader review of the
role of reserve requirements in the
conduct of monetary policy. Finally, as
explained in the companion Regulation
D rulemaking announced today, the
Board is eliminating the prohibition on
member bank pass-through accounts
and is amending the numeric
limitations on convenient transfers from

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savings deposits to remove the sublimit
that applied to checks and drafts.9

2. Section 204.2(y) Definition of Eligible
Institution

E. Section-by-Section Analysis

Section 19(b)(12) of the Act permits
Reserve Banks to pay interest on
balances held by or behalf of
‘‘depository institutions.’’ Because
section 19(b)(12)(C)’s definition of
‘‘depository institution’’ is broader than
the definition of that term in section
19(b)(1)(A) of the Act and in Regulation
D, the interim final rule used the new
term ‘‘eligible institution’’ to refer to
those ‘‘depository institutions’’ listed in
section 19(b)(12)(C) that are eligible to
receive interest on their balances. The
Board received no comment on this
definition and is retaining the current
provision but moving it to the
definitions section of the regulation,
redesignated as § 204.2(y).

1. Section 204.2(v) Definition of
Clearing Balance
The interim final rule defined the new
term ‘‘clearing balance’’ as ‘‘the amount
that an eligible institution holds to
satisfy a contractual clearing balance
with a Federal Reserve Bank, in
addition to any required reserve
balance.’’ The Board received no
comments on this provision of the
interim final rule. As part of the final
rule, the Board is adopting a definition
of ‘‘clearing balance’’ that more
accurately reflects calculations of
account balances and interest payments.
The final rule defines ‘‘clearing
balance’’ as ‘‘the average balance held in
an account at a Federal Reserve Bank by
an institution over a reserve
maintenance period to satisfy its
contractual clearing balance with a
Reserve Bank.’’ Thus, the amount of
funds an institution actually maintains
for clearing purposes may be different
from its ‘‘contractual clearing balance,’’
which is the amount that the institution
has agreed to maintain, on average, over
the reserve maintenance period.
Further, the phrase ‘‘in addition to any
required reserve balance’’ is
unnecessary in light of the new
definition of ‘‘contractual clearing
balance,’’ which specifies that such
amount is in addition to the institution’s
reserve balance requirement.10
As stated in the interim final rule,
only certain institutions are eligible to
receive earnings on their balances at
Reserve Banks (‘‘eligible institutions’’).
Accordingly, the interim final rule’s
definition of ‘‘clearing balance’’ was
restricted to ‘‘eligible institutions.’’
Institutions that are not ‘‘eligible
institutions,’’ however, may hold
balances for clearing purposes in the
institution’s Reserve Bank account.
Therefore, the Board is adopting a
definition of ‘‘clearing balance’’ that is
not limited to institutions that are
eligible to receive earnings on balances
at Reserve Banks. For ease of reference,
the final rule places all the definitions
in a single section of Regulation D
(§ 204.2), and thus, the rule redesignates
§ 204.10(d)(1) as § 204.2(v).
9 See final amendments to Regulation D
elsewhere in today’s Federal Register.
10 See final amendments to Regulation D
elsewhere in today’s Federal Register that define
‘‘contractual clearing balance’’ as ‘‘an amount that
an institution agrees or is required to maintain in
its account at a Federal Reserve Bank in addition
to balances the institution may hold to satisfy its
reserve balance requirement.’’

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3. Section 204.2(z) Definition of Excess
Balance
The interim final rule defined ‘‘excess
balance’’ as ‘‘the average balance held in
an account at a Federal Reserve Bank by
or on behalf of an eligible institution
over a reserve maintenance period that
exceeds the sum of the required reserve
balance and any clearing balance.’’ The
Board received no comments on this
definition and is retaining the current
provision but moving it to the
definitions section of the regulation,
redesignated as § 204.2(z), with one
technical amendment. Like the
definition of ‘‘clearing balance,’’
discussed supra, the interim final rule’s
definition of ‘‘excess balance’’ was
limited to eligible institutions. Because
institutions other than eligible
institutions may maintain excess
balances at Reserve Banks, the Board is
adopting a definition of ‘‘excess
balances’’ in the final rule that is not
limited to ‘‘eligible institutions.’’
4. Section 204.2(bb) Definition of
Required Reserve Balance
The interim final rule defined
‘‘required reserve balance’’ as ‘‘the
average balance held in an account at a
Federal Reserve Bank by or on behalf of
an eligible institution over a reserve
maintenance period to satisfy the
reserve requirements of this part.’’ The
Board received no comments on this
definition and is retaining the current
provision but moving it to the
definitions section of the regulation,
with one technical amendment,
redesignated as section 204.2(bb).
Because the term ‘‘required reserve
balance’’ is used in Regulation D in
contexts other than paying earnings on
balances at Reserve Banks, the
definition of the term in the final rule
is not limited to ‘‘eligible institutions.’’

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5. Section 204.2(cc) Definition of
Targeted Federal Funds Rate
The interim final rule defined
‘‘targeted federal funds rate’’ as ‘‘the
federal funds rate established from time
to time by the Federal Open Market
Committee.’’ The Board received no
comments on this definition and is
retaining the current provision but
moving it to the definitions section of
the regulation, redesignated as
§ 204.2(cc).

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6. Section 204.10(a) Payment of Interest
on Balances
The Board amended Regulation D to
direct the Reserve Banks to pay interest
on required reserve balances and excess
balances maintained at Reserve Banks
by or on behalf of an eligible institution.
The Reserve Banks make interest
payments within the existing framework
for reserve computation and
maintenance, which includes reserve
averaging, carryover provisions, and
reserve deficiency charges. For both
excess balances and required reserve
balances, Reserve Banks pay interest on
average balances maintained over the
reserve maintenance period. This
approach is consistent with the current
reserves framework under which
compliance with reserve requirements is
measured over either a seven-day or a
fourteen-day reserve maintenance
period, depending on the size of the
institution. Interest is credited to
eligible institutions after the close of the
maintenance period (usually 15 days
thereafter) in order to apply reserve
carryover provisions.
One commenter stated that paying
interest on required reserve balances
rendered useless the current ‘‘as-of
adjustment’’ process for correction of
errors from previous reserve
maintenance periods. An as-of
adjustment is a memorandum item used
by the Federal Reserve to correct the
effect of errors made in processing of
checks or other transactions on an
institution’s reserve position. These
technical adjustments are used when
determining a depository institution’s
required reserve balance and clearing
balance for the payment of interest and
therefore remain useful.11 Accordingly,
the Board is adopting the current
language in § 204.10(a) as part of its
final rule.
7. Section 204.10(b) Rate
The Board received no comments on
the initial rate of interest on required
11 More detailed information about the ‘‘as-of
adjustment’’ process is available in the Reserve
Maintenance Manual, available at http://
www.frbservices.org/files/regulations/pdf/rmm.pdf.

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reserve balances. The Board received
two comments on the formula for the
rate on excess balances. One commenter
stated that the initial rate paid on excess
balances (the lowest targeted federal
funds rate during the reserve
maintenance period less 75 basis points)
and the rate after the first adjustment to
the formula for calculating the interest
rate on excess balances (the lowest
targeted federal funds rate during the
reserve maintenance period less 35 basis
points) were too high in a
‘‘dysfunctional market.’’ The Board
received one comment that reducing the
75-basis point difference between the
rate of interest on excess balances and
the targeted federal funds rate over the
reserve maintenance period exacerbated
the ‘‘untimely implementation’’ of the
payment of interest on balances at
Reserve Banks, but that commenter did
not propose an alternative rate. One
commenter suggested that the Board set
the rate of interest on excess balances at
the effective federal funds rate, rather
than the targeted federal funds rate, so
as to avoid artificially drawing funds to
the Reserve Banks.
The Board has continued to evaluate
the rate of interest on required reserve
and excess balances and is not at this
time changing the rates from the current
amount of 1⁄4 percent. Flexibility to
make adjustments to the rates of interest
in response to evolving market
conditions continues to be necessary.
Accordingly, the Board is retaining the
current language of § 204.10(b)(3),
which provides that the Board may
revise from time to time the rates for
payment of interest on balances at
Reserve Banks.
8. Section 204.10(c) Pass-Through
Balances
a. Background
As noted above, the 2006 Act
authorized Reserve Banks to pay
earnings on balances maintained at a
Reserve Bank by or on behalf of certain
depository institutions. The 2006 Act
also authorized the Board to prescribe
regulations concerning ‘‘the
responsibilities of depository
institutions, Federal Home Loan Banks,
and the National Credit Union
Administration Central Liquidity
Facility with respect to crediting and
distribution of earnings attributable to
balance maintained * * * in a Federal
Reserve bank by any such entity on
behalf of depository institutions.’’ 12
Thus, the 2006 Act contemplated that
certain institutions (such as Federal
Home Loan Banks) could hold balances
12 Federal Reserve Act § 19(b)(12)(B)(iii), 12
U.S.C. 461(b)(12)(B)(iii).

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on behalf of depository institutions that
were eligible to earn interest on those
balances, even if the correspondent
institutions were not themselves eligible
to receive earnings on their own
balances.
b. Correspondents That Are Eligible
Institutions
Under the interim final rule, Reserve
Banks paid interest on required reserve
balances maintained on behalf of an
eligible institution. Where a passthrough correspondent is an eligible
institution, the required reserve
balances in the correspondent’s account
may include those balances held by the
correspondent to meet its own reserve
requirement (if any), as well as those
balances held to meet its respondents’
reserve requirements. The interim final
rule also permitted, but did not require,
a pass-through correspondent to pass
back to its respondent interest paid on
behalf of that respondent’s required
reserve balances.
The Board requested comment on
whether it should permit or require a
correspondent to pass back interest to
its respondents. In response, the Board
received four comments. Two
commenters supported permissive
passing back of interest in order to
preserve the parties’ flexibility in
negotiating contractual relationships.
One commenter supported requiring
passing back of interest, stating that
permitting correspondents to retain the
interest would be unfair. This
commenter also suggested delaying the
effective date of a pass-back requirement
to two years after adoption of a final
rule in order to provide correspondents
with an opportunity ‘‘to modify
accounting systems and business
models.’’ Finally, one commenter stated
that paying interest on pass-through
balances as a lump-sum was a poor
service because doing so places
responsibility on the correspondent to
calculate the amount of interest to be
passed back to each respondent.
Under the final rule, correspondents
that are eligible institutions will
continue to be permitted, but not
required, to pass back to their
respondents interest earned on balances
held on behalf of the respondents. As
these correspondents are eligible to earn
interest on their own account balances,
permitting them to make arrangements
with their respondents with respect to
passing back of interest is consistent
with the statutory provisions. In
addition, permissive, but not required,
passing back of interest avoids
interfering with existing correspondentrespondent arrangements.
Correspondents structure their

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relationships with respondents in a
variety of ways, depending on factors
such as services provided or balances
held. Respondents may adjust the level
of balances held with a correspondent
in response to changes in the rates
received on those balances, as well as in
response to other factors. Respondents
that are not satisfied with their existing
correspondent arrangements may take
steps to renegotiate the terms of the
relationship or enter into a relationship
with a different correspondent.
Additionally, permitting, but not
requiring, the passing back of interest to
respondents is consistent with the
treatment of reserve deficiency charges
in Regulation D.13 Reserve Banks assess
deficiency charges to the account of the
pass-through correspondent for any
deficiency in its account balances, even
if the deficiency is attributable to the
correspondent’s respondent. Then, the
pass-through correspondent determines
whether to assess a deficiency charge on
its respondent, or whether to make
adjustments to other aspects of the
correspondent-respondent relationship
in response to the deficiency.
Accordingly, the Board has determined
to continue permitting, but not
requiring, correspondents that are
eligible institutions to pass back to
respondents earnings on both required
reserve balances and excess balances
held on behalf of the respondents.
c. Correspondents That Are Not Eligible
Institutions
Under the interim final rule, Reserve
Banks paid interest on required reserve
balances maintained on behalf of an
eligible institution, even if the passthrough correspondent was not an
eligible institution. Where a pass-though
correspondent is not an eligible
institution, the required reserve
balances held in the correspondent’s
account are solely those balances held
to meet its respondent’s reserve
requirements.
The interim final rule also provided
that Reserve Banks pay interest on
excess balances maintained on behalf of
an eligible institution, even if the passthrough correspondent is not an eligible
institution but has excess balances in its
account. Because Reserve Banks cannot
determine whether all or part of the
excess balances in a pass-through
correspondent’s account are held on
behalf of respondents without imposing
additional reporting or accounting
requirements, the interim final rule
deemed all of the excess balances held
in an account of a correspondent that is
13 See 12 CFR 204.5(d)(4)(i) (formerly 12 CFR
204.3(i)(3)(ii)).

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not an eligible institution to be held on
behalf of the correspondent’s
respondents.
The Board requested comment on
alternative methods for determining
whether all or part of the excess
balances in a correspondent’s account at
a Reserve Bank are held on behalf of the
respondent where the correspondent is
not an eligible institution. The Board
received one comment in support of
deeming all excess balances held in an
account of a pass-through correspondent
that is not an eligible institution to be
held on behalf of the correspondent’s
respondents. This commenter stated
that deeming the excess balances to be
held on behalf of the respondents would
avoid imposing ‘‘unnecessarily
burdensome’’ reporting requirements on
correspondents and provide flexibility
in structuring correspondent-respondent
relationships. One commenter, however,
indicated that additional reporting
requirements would not be burdensome
because correspondents already
maintain records of excess balances
held on behalf of respondents.
Since the implementation of paying
interest on balances at Reserve Banks,
some correspondents that are not
eligible institutions are holding
extremely high excess balances relative
to the total assets of their respondents,
indicating that these balances may not
be held on behalf of those respondents.
In order to carry out the intent of the
2006 Act with respect to institutions
that are and are not eligible to receive
interest on balances held at Reserve
Banks, the final rule will no longer
deem any excess balance in the account
of a correspondent institution that is not
an eligible institution to be held on
behalf of respondents. Thus, any excess
balance in the account of a
correspondent that is not an eligible
institution will be attributable to the
correspondent, and no earnings will be
paid on the excess balance in that
account. The respondents of a
correspondent that is not an eligible
institution may elect to participate in an
excess balance account (discussed infra)
in order to receive earnings on excess
balances.
Required reserve balances held on
behalf of respondents by correspondents
that are not eligible institutions,
however, will continue to receive
interest, which will be posted to the
correspondent’s master account. As
discussed supra, where a pass-through
correspondent is not an eligible
institution, the required reserve
balances held in the correspondent’s
account will be solely those held to
meet its respondent’s reserve
requirements. Further, because any

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excess balance held in the account of a
correspondent that is not an eligible
institution will not receive interest, any
earnings received on balances in such
an account will be attributable solely to
the required reserve balances of the
correspondent’s respondents. Unlike the
interim final rule, the final rule will
require correspondents that are not
eligible institutions to pass back to their
respondents all interest credited to the
correspondent’s accounts. The
correspondent is responsible for
calculating the amount of interest
apportioned to each of its respondents.
d. Exemption From Regulation Q
Under the interim final rule, passing
back interest to respondents is not a
payment of interest on a demand
deposit for purposes of Regulation Q (12
CFR part 217). One commenter stated
that by paying interest on ‘‘transaction
accounts,’’ the Board has ‘‘created an
unfair playing field’’ by not allowing
other correspondent banks to do the
same for the same types of accounts
held with them. Another commenter
expressed concern that requiring a
correspondent to hold excess balances
on its balance sheet negated the FDIC’s
insurance coverage of the respondent’s
demand deposit account by
transforming the respondent’s account
from a non-interest-bearing transaction
account to an interest-bearing
transaction account.
The Board recognizes that, although
Reserve Banks may pay interest on
balances that are subject to immediate
withdrawal, many private sector banks
are prohibited by law from doing so.14
The Board has long sought statutory
amendments to eliminate the
prohibition against interest on demand
deposits. The 2006 Act, however,
expressly authorizes the Board to
prescribe regulations to allow passthrough correspondents to pass back
interest to respondents. Congress,
therefore, contemplated that passthrough correspondents could pass back
part or all of the interest received in a
correspondent’s Reserve Bank account
to its respondents, even though the
payment of interest on demand deposit
accounts is otherwise prohibited.
Accordingly, the Board has specified in
the final rule that when a pass-through
correspondent passes back to its
respondent any interest paid on
balances held on behalf of the
14 For example, section 19(i) of the Act provides:
‘‘[no] member bank shall, directly or indirectly, by
any device whatsoever, pay any interest on any
deposit which is payable on demand * * * ’’ See
Regulation Q (Prohibition Against Payment of
Interest on Demand Deposits), which implements
section 19(i) (12 CFR 217).

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respondent, such a payment is not a
payment of interest on a demand
deposit for purposes of Regulation Q.15
The Board received no other comments
on this provision and is retaining the
current language in the final rule, with
the exception of one technical
amendment for clarity.
II. Excess Balance Accounts
A. Background

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1. Correspondent-Respondent
Relationship
Since the implementation of the
payment of interest on excess balances
of eligible institutions, eligible
institutions that are respondents of a
pass-through correspondent may receive
earnings on excess balances in two
ways. First, the respondents of a passthrough correspondent may direct the
correspondent to sell the respondent’s
excess funds in the federal funds
market. Second, under the interim final
rule adopted in October, the
respondents may direct the
correspondent to hold the respondent’s
excess funds as excess balances in the
correspondent’s account at a Reserve
Bank. These two approaches have
different implications for the
correspondent’s balance sheet and its
leverage ratio for capital adequacy
purposes. If a correspondent holds its
respondents’ excess balances in the
correspondent’s account at a Reserve
Bank, the correspondent’s account
balance at the Reserve Bank increases.
Accordingly, the correspondent has
more assets on its balance sheet,
resulting in a lower leverage ratio for
capital adequacy purposes. In contrast,
if the correspondent sells the funds in
the federal funds market on the
respondent’s behalf, the balances are
transferred to the entity purchasing
them. This transaction is effected by a
debit to the correspondent’s account at
a Reserve Bank and a credit to the
purchaser’s account at a Reserve Bank.
All other things being equal, the
correspondent’s Reserve Bank account
balance is lower. The correspondent has
fewer assets on its balance sheet, and
therefore, has a higher regulatory
leverage ratio.
When the federal funds rate is below
the rate the Reserve Banks pay on excess
balances, respondents have an incentive
to shift the investment of their excess
funds away from sales of federal funds
through their correspondents, and
toward holding those funds as excess
15 See 12 CFR 329.2 (Payment of interest) and 12
CFR 329.3 (Exception to prohibition on payment of
interest) for implications to FDIC regulations
regarding payment of interest.

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balances in accounts at the Reserve
Banks. Although correspondents may
hold those funds as excess balances at
a Reserve Bank on behalf of the
respondent, doing so could result, in
some cases, in a significant reduction in
a correspondent’s regulatory leverage
ratio for capital adequacy purposes.
Alternatively, a respondent could open
its own account at a Reserve Bank;
doing so, however, could potentially
disrupt part or all of the respondent’s
established relationship with its
correspondent.
2. Comments Received on Paying
Interest on Excess Balances Held by
Correspondents on Behalf of
Respondents
In response to its interim final rule
that implemented payment of interest
on balances at Reserve Banks, the Board
received comments concerning the
effects of paying interest on excess
balances on correspondent-respondent
relationships. Five commenters stated
that paying interest on excess balances,
in conjunction with unusual market
conditions, was causing respondents to
shift funds away from correspondents to
the Reserve Banks; thus, disrupting
correspondent-respondent relationships.
Three commenters stated that
respondents’ increasing demands to
have correspondents hold funds as
excess balances (as opposed to selling
the funds in the federal funds market)
was not only decreasing the availability
of federal funds, but was also requiring
correspondents to maintain more capital
to raise their leverage ratio for capital
adequacy purposes. One commenter
expressed concern that, without changes
to the interim final rule, the long-term
viability of correspondent-respondent
relationships would be jeopardized.
The Board received five comments
proposing solutions to mitigate the
adverse effects on correspondentrespondent relationships of paying
interest on excess balances. Four
commenters proposed that the Board
authorize new accounts for the purpose
of holding excess balances that did not
require correspondents to hold the
respondents’ excess balances on their
balance sheets. One commenter
suggested that the Reserve Banks
purchase excess funds directly from
correspondents at the rate of interest on
excess balances.
B. Excess Balance Account Proposed
Rule
In response to these concerns, the
Board requested comment in January
2009 on a proposal to amend Regulation
D to authorize the creation of excess
balance accounts (‘‘EBAs’’) (74 FR 5628

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25625

(Jan. 30, 2009)). The proposal would
authorize the establishment of EBAs for
maintaining the excess balances of
participating eligible institutions (‘‘EBA
Participants’’). The EBA Participants
would designate another institution to
act as their agent (‘‘EBA Agent’’) for
purposes of general account
management, including transferring
excess balances in and out of the EBA
and apportioning the interest paid on
excess balances. The Board proposed
that the EBA Agent could not comingle
its funds in the EBA. The excess
balances in the EBA would represent a
liability of the Reserve Bank solely to
the EBA Participants. Neither the EBA
Participants nor the EBA Agent could
maintain required reserve or clearing
balances in the EBA or use the EBA for
general payment or other activities. The
Board stated in the proposal that it
would re-evaluate the continuing need
for EBAs when more normal market
functioning resumes.
C. General Comments and Analysis
In response to its request for comment
on the EBA proposal, the Board received
61 comments, representing comments
from 44 depository institutions, two
financial holding companies, one
Federal Home Loan Bank, five financial
institution trade associations, and three
individuals. Sixteen commenters
supported the proposal in its entirety.
Two of these commenters sought
clarification on technical aspects of the
proposed rule on EBAs. Several
commenters supported EBAs in general,
but suggested that EBA Participants be
able to designate more than one
institution to act as EBA Agent. One
commenter found no significant value
in the EBA proposed rule, citing high
administrative costs and few benefits.
One commenter raised concerns about
the impact of EBAs on existing business
models if balances are moved into
Reserve Bank accounts. Two
commenters encouraged the Board to
evaluate the continuing need for EBAs
when more normal market functioning
resumes; one of these commenters
suggested the Board seek public
comment as part of its re-evaluation.
The Board has carefully considered
the comments and has determined to
authorize the establishment of EBAs,
largely as described in the proposal. The
Board believes that authorizing EBAs
should reduce the potential for
significant disruptions to long-standing
correspondent-respondent relationships
in the current market environment.
Because the excess balances of EBA
Participants in EBAs would be Reserve
Banks’ direct liabilities to EBA
Participants, correspondents would not

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show those balances on their balance
sheets. Therefore, the adverse leverage
ratio impact of correspondents of
holding respondent excess balances in
the correspondent’s account would be
mitigated. Further, participation in an
EBA, either as a participant or agent, is
voluntary. Thus, if an institution does
not believe that an EBA will provide
additional value, the institution does
not have to participate in an EBA or act
as an EBA Agent. As stated in the
proposal, the Board will re-evaluate the
continuing need for EBAs when more
normal market functioning resumes.

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D. Section-by-Section Analysis
1. Section 204.2(aa) Definition of Excess
Balance Account
The Board proposed to define ‘‘excess
balance account’’ as ‘‘an account at a
Reserve Bank pursuant to § 204.10(e) of
this part that is established by one or
more eligible institutions and in which
only excess balances of the participating
eligible institutions may at any time be
maintained.’’ The proposed rule
explicitly excludes excess balance
accounts from the definition of ‘‘passthrough accounts.’’
The Board received three comments
seeking clarification as to whether each
EBA Participant needed to open an EBA
or whether the EBA Participants could
designate an EBA Agent to open an EBA
on behalf of the EBA Participants. To
establish an EBA, eligible institutions
that desire to become EBA Participants
must designate one other institution to
act as the EBA Agent for that EBA. EBA
Participants will be required to execute
EBA agreements with the Reserve Bank
where the EBA Agent maintains its own
master account (‘‘Administrative
Reserve Bank’’). Similarly, the EBA
Agent will be required to execute an
EBA agreement with its Administrative
Reserve Bank. In order to facilitate
establishing EBAs and to reduce
administrative burdens, EBA
Participants will deliver their executed
EBA agreement to their EBA Agent. The
EBA Agent then will deliver the
executed EBA agreements of all the EBA
Participants for which it acts as EBA
Agent to its Administrative Reserve
Bank. The Board is adding language to
the definition of ‘‘excess balance
account’’ to clarify that eligible
institutions establish an EBA through
the EBA Agent. The Board is also
making a technical amendment to the
definition to reflect renumbering of
sections elsewhere in Regulation D. The
Board is also redesignating the
definition as § 204.2(aa) (from
§ 204.10(d)(6) in the proposed rule) in
connection with moving the definition

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The proposed rule (at § 204.10(e)(1))
provided that a Reserve Bank may
establish an excess balance account for
eligible institutions. The proposed rule
also provided that the excess balances
in the EBA are the property of the
eligible institutions that participate in
the EBA and represent a liability of the
Reserve Bank solely to the participating
institution. The Board received no
comments on this portion of the
proposal.
The Board is deleting the phrase that
states the excess balances are the
property of the eligible institutions. This
phrase is not necessary and its deletion
does not change the substance of the
provision, which continues to state that
excess balances represent a liability of
the Reserve Bank solely to the
participating institutions. The Board is
otherwise adopting the provision as
proposed.

provide that the EBA Agent may retain
part or all of the interest paid as part of
the EBA Agent’s compensation for
providing EBA Agent services or other
services for the EBA Participant. Thus,
the EBA Agent is not required by
regulation to utilize the same formula
for the disposition of earnings to EBA
Participants as the Reserve Banks use
for calculating interest on the EBA’s
aggregate balance. Moreover, the Board
anticipates that the Reserve Banks will
establish terms and conditions such that
each EBA Agent will manage only one
EBA.16 Because acting as an EBA Agent
is voluntary, the Board does not believe
it necessary to delay the effective date
of the rule. The Board is making one
additional technical amendment to the
final rule to replace the proposed phrase
‘‘agent of the eligible institutions’’ with
the phrase ‘‘agent of the participating
institutions.’’ This amendment is
intended to provide consistent usage of
terms throughout the final rule and does
not represent a substantive change to
the provision.

3. Section 204.10(d)(2) EBA Agent

b. Participation in One EBA

a. General Account Management

The proposed rule provided that the
EBA Participants would authorize
another institution to act as its EBA
Agent with respect to an EBA. The
proposed rule, however, did not specify
whether an EBA Participant could
participate in more than one EBA. One
commenter recommended removing the
requirement that an EBA Participant
designate only one institution as its EBA
Agent, while not specifically suggesting
that an EBA Participant be able to
designate more than one institution as
EBA Agent or to participate in more
than one EBA. This commenter stated
that requiring an EBA Participant to
designate only one EBA Agent was
unnecessary as most respondents ‘‘do
not participate in multiple
correspondent agency programs.’’ Some
commenters, however, suggested that
the final rule should permit EBA
Participants to participate in more than
one EBA.17 These commenters stated
that respondents currently use more
than one correspondent institution for
selling funds in the Federal funds
market, among other services, in order
to diversify credit risk, obtain better

into the general definition section of
Regulation D.
2. Section 204.10(d)(1) Establishing an
EBA

The proposed rule on EBAs provided
that the EBA Participants would
authorize another institution, the EBA
Agent, to act as agent to perform general
account management, including
transferring excess balances of EBA
Participants into and out of the EBA.
One commenter expressed concerns
about the feasibility for the EBA Agent
of passing back interest. Specifically,
the commenter sought clarification as to
whether an EBA Agent could distribute
the earnings to the EBA Participants at
a different rate than the Reserve Banks
paid out the earnings, as using the same
formula as the Reserve Banks would
require significant programming efforts.
One commenter requested that the
Board delay the effective date of the rule
120 days after publication to provide
sufficient time to adjust operating
systems to accommodate the new EBA
Agent services.
The EBA program contemplates that
Reserve Banks will calculate interest on
the aggregate balance in the EBA, rather
than calculate the amount of interest
attributable to each EBA Participant’s
balances in the EBA. The EBA
Participants will be responsible for
instructing the EBA Agent with respect
to the disposition of the interest. For
example, an EBA Participant and an
EBA Agent may by agreement provide
that all interest attributable to an EBA
Participant should be paid to the EBA
Participant, or may by agreement

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16 An EBA Agent that wishes to segregate
different types of respondents from one another can
set up subaccounts for the EBA.
17 Because the proposed rule on EBAs limits EBA
Participants to designating one institution as EBA
Agent for the EBA, an EBA Participant that wished
to designate multiple institutions as EBA Agent
would need to participate in multiple EBAs to do
so.

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Federal Register / Vol. 74, No. 102 / Friday, May 29, 2009 / Rules and Regulations
rates, and for liquidity contingency
planning purposes.
While the Board recognizes that
certain respondents may wish to
maintain relationships with more than
one correspondent for various purposes,
the Board believes that permitting each
eligible institution to participate in only
one EBA is appropriate. Specifically,
multiple EBAs are not necessary in
order to diversify credit risk, as with
federal funds sales, because there is no
credit risk associated with maintaining
a balance in an account at a Reserve
Bank. Similarly, the need to use
multiple agents to manage liquidity risk
does not exist in the context of EBAs,
because excess balances in an EBA are
highly liquid. Moreover, any potential
disruption to existing correspondentrespondent relationships is lessened by
the fact that each EBA Participant can
choose each day whether to sell funds
in the federal funds market (through any
number of correspondent institutions),
to place the funds at a Federal Reserve
Bank through their (single) EBA Agent,
or to select a combination of the two.
Accordingly, EBA Participants may
maintain relationships with more than
one correspondent notwithstanding the
fact that an EBA Participant participates
in only one EBA at a Reserve Bank.
Restricting eligible institutions to
participating in only one EBA is
consistent with Regulation D’s treatment
of correspondent-respondent
relationships in pass-through
arrangements, where each respondent
uses a single correspondent to pass
through the respondent’s required
reserve balances.18 This singlecorrespondent structure also reflects the
current Federal Reserve policy that
permits each chartered depository
institution to maintain a single master
account at one Reserve Bank. Such a
structure provides streamlined control
and a single coordination point for the
Reserve Banks to manage the debtorcreditor relationship with each
depository institution. This structure
also helps minimize the risk of loss to
the Federal Reserve in the event the
account holder becomes insolvent.
Authorizing the establishment of EBAs
loosens such control and coordination
to the extent that it potentially permits
EBA Participants to have accounts at
two Reserve Banks: one account in the
district where the EBA Participant itself
is located, and an EBA in the district
where the EBA Agent is located. Given
that offering EBAs is motivated largely
by unusual financial market conditions
in which the effective federal funds rate
18 12

CFR 204.5(d)(1) (formerly 12 CFR
204.3(i)(1)).

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has been below the rate on excess
balances, and given that EBAs are being
offered on a temporary basis, staff
believes that permitting EBA
Participants to potentially have an EBA
and a master account at different
Reserve Banks is appropriate to ensure
that respondents are able to hold excess
balances within their existing
correspondent-respondent relationships.
A more significant expansion, however,
involving multiple account
relationships by permitting eligible
institutions to participate in more than
one EBA, introduces further complexity
into the oversight and coordination for
the Reserve Banks for managing the
debtor-creditor relationship without a
substantial justification for doing so.
The Board believes that permitting
eligible institutions to participate in one
EBA, but not more, at this time benefits
both correspondent and respondent by
allowing respondents to place excess
balances at a Reserve Bank in a way that
does not increase the leverage ratio for
the correspondent, therefore mitigating
disruption to correspondent-respondent
relationships. This approach also does
not significantly increase the
complexity for the Reserve Banks in
managing these accounts and the
associated debtor-credit relationships.
In addition, the significance of the
demand for participation in multiple
EBAs is not clear from the comments
received, because only a few
commenters expressed an interest in
multiple EBAs. Accordingly, the Board
expects that, absent a compelling reason
to do otherwise at this time, the Reserve
Banks will set terms and conditions
with respect to EBAs that will limit each
eligible institution to participation in
one EBA.
c. EBA Agent Must Maintain Separate
Master Account
The proposed rule also provided that
the EBA Agent ‘‘must maintain its own
separate account at a Reserve Bank’’ and
that the EBA Agent may not commingle
its own funds in the EBA. The proposal
indicated that the EBA would be
established at the Reserve Bank where
the EBA Agent maintains its own master
account, although the proposed
regulatory text did not reflect this.
Accordingly, the final rule adds
language to the regulatory text to specify
that the EBA must be held at the
Reserve Bank where the EBA Agent
maintains its master account.
d. Record-Keeping
The supplementary information to the
proposed rule stated that the EBA Agent
would be responsible for maintaining
records adequate to demonstrate the

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25627

level of excess balances in the EBA of
each EBA Participant. The Board
received five comments regarding
record-keeping requirements for the
EBA Agent. One commenter suggested
the Board clarify the record-keeping
requirements of an EBA Agent with
respect to the EBA. Three commenters
stated that EBA Agents should be
responsible for maintaining adequate
records that could demonstrate the level
of excess balances in the EBA of each
EBA Participant. Additionally, one
commenter indicated that maintaining
such records would not be difficult for
EBA Agents because correspondents
maintain daily, detailed records of
respondents’ ‘‘agency’’ funds. Because
the informational needs of each Reserve
Bank with respect to each EBA may
vary, the Board has not included such
specifications in the final rule. Rather,
the Board believes that setting forth the
EBA Agent’s record-keeping
responsibilities is more appropriately
done through account agreements with
the Reserve Banks or through account
terms and conditions.
4. Section 204.10(d)(3) Balances
Maintained in EBA
The proposed rule provided that, at
any given time, only excess balances of
an eligible institution may be
maintained in an EBA. The proposed
rule also provided that balances
maintained in an EBA would not satisfy
any institution’s reserve balance
requirement or contractual clearing
balance. The Board received two
comments on this provision, both
seeking clarification on how EBA
Participants should classify balances
held in an EBA.
Balances held in an EBA by an EBA
Participant represent a liability of the
Reserve Bank to the EBA Participants
and not to the EBA Agent. Therefore, for
reporting and accounting purposes, an
EBA Participant should treat balances
held in an EBA as balances held at a
Reserve Bank and should report such
balances as ‘‘balances due from a
Federal Reserve Bank’’ for purposes of
FR 2900 deposit reporting.19 The Board
received no other comments on this
provision and is adopting the proposed
provision, with minor editorial
revisions, redesignated as § 204.10(d)(3).
5. Section 204.10(d)(4) Restrictions on
Use of EBA
The proposed rule provided that
neither EBA Participants nor the EBA
Agent may use the EBA for general
19 See Instructions for Form FR 2900 (Sep. 2003)
at p. 39, no. 1 (http://www.federalreserve.gov/
reportforms/forms/FR_2900cb20071001_i.pdf).

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payments or other activities. The Board
received one comment on this
provision, seeking clarification on
restrictions as to when the EBA Agent
would be required or allowed to move
excess balances into the account.
The final rule imposes no regulatory
restrictions on when an EBA Agent may
or must transfer funds into and out of
an EBA. The EBA Agent, however, must
manage the EBA such that the account
does not incur either intra-day or
overnight overdrafts. The Board is
adopting this provision as proposed,
redesignated as § 204.10(d)(4).
6. Section 204.10(d)(5) Payment of
Interest on Balances in EBA
The Board proposed that interest
would be paid on excess balances in
accordance with section 204.10(b)(2).
The Board received no comments on
this provision. In light of the
amendments to Regulation D since the
proposed rule on EBAs setting forth the
Board’s authority to provide that
interest on excess balances be paid at a
different rate than the rate set forth in
section 204.10(b)(2), the final rule will
reflect that authority set forth in current
section 204.10(b)(3).

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7. Section 204.10(d)(6) Additional
Terms and Conditions
The proposed rule on EBAs was silent
about the authority of Reserve Banks to
establish additional terms and
conditions with respect to the operation
of an EBA. The Board, however, is
adding new § 204.10(d)(6) to the final
rule to clarify that the Reserve Banks
have the authority to set additional
terms and conditions with respect to the
operation of EBAs, to the extent that
such terms and conditions are
consistent with provisions in Regulation
D. Such terms and conditions include,
but are not limited to, terms of service,
fees for services, conditions under
which an institution may act as agent
for an EBA, restrictions on the EBA
Agent’s account management, penalties
for noncompliance with the terms of
Regulation D’s provisions on EBAs or
with the additional terms and
conditions established by the Reserve
Banks, and termination of EBAs. The
provision provides examples of the
operational aspects for which the
Reserve Banks may set forth additional
terms and conditions, but indicates that
those categories of additional terms and
conditions are illustrative.
III. Clearing Balance Policy
Adjustments
At the time it adopted the interim
final rule, the Board made adjustments
to its clearing balance policy so as to

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discontinue practices related to reserve
requirements that were no longer
necessary in light of the amendments to
Regulation D. First, the Board
eliminated the ‘‘imputed reserve
requirement adjustment’’ to earnings
credits because reserves on respondents’
balances would earn interest at the rate
on required reserve balances. Second,
the Board eliminated the ‘‘marginal
reserve requirement adjustment’’
because respondents would be
indifferent between holding balances at
a Reserve Bank (and earning the rate on
required reserves balances) and
maintaining the balance at a privatesector correspondent (taking a due from
deduction, and investing those funds).
Finally, the Board eliminated the
imputed reserve requirement
adjustment and the adjustment for cash
items in the process of collection that
are applied when measuring float costs
to be recovered by Reserve Bank priced
services. The Board received no
comments on its adjustments to the
clearing balance policy and is retaining
that policy as previously adopted.
IV. Transitional Adjustments in
Mergers
The interim final rule eliminated the
provisions in Regulation D associated
with merger-related adjustments to
reserve requirements, applicable to
mergers completed on or after October
9, 2008. The provisions were set forth in
§ 204.4. The Board received no
comments on this issue and is not
reinstating the provisions.
V. Solicitation of Comments Regarding
Use of ‘‘Plain Language’’
Section 722 of the Gramm-LeachBliley Act of 1999 (12 U.S.C. 1408)
requires the Board to use ‘‘plain
language’’ in all final rules. The Board
has sought to present this final rule in
a simple and straightforward manner.
The Board received no comments on
whether the interim final rule and
proposed rule were clearly stated and
effectively organized or on how the
Board might make the text easier to
understand.
VI. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA)
requires an agency that is issuing a final
rule to prepare and make available a
regulatory flexibility analysis that
describes the impact of the final rule on
small entities. 5 U.S.C. 603(a). The RFA
provides that an agency is not required
to prepare and publish a regulatory
flexibility analysis if the agency certifies
that the final rule will not have a
significant economic impact on a

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substantial number of small entities. 5
U.S.C. 605(b).
Pursuant to section 605(b), the Board
certifies that this final rule will not have
a significant economic impact on a
substantial number of small entities.
The rule implements a program for
paying interest on certain balances held
by eligible institutions at the Federal
Reserve Banks and will benefit small
institutions that receive such interest.
Additionally, the rule permits, but does
not require, institutions to establish
EBAs at Reserve Banks. The impact on
institutions choosing to establish EBAs
at Reserve Banks would be positive, not
adverse, because EBA Participants
would be able to earn the rate payable
on excess balances in a debtor-creditor
relationship directly with a Reserve
Bank without disrupting established
correspondent-respondent relationships.
Likewise, the impact would be positive,
not adverse, on institutions that choose
to establish EBAs but that are not
currently in correspondent-respondent
relationships, as such institutions
would be expected to establish EBAs
only to the extent that EBA Agents and
EBA Participants found it mutually
beneficial to do so. There are no new
reporting, recordkeeping, or other
compliance requirements associated
with this rule.
VII. Paperwork Reduction Act
In accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C. 3506;
5 CFR Part 1320 Appendix A.1), the
Board reviewed the final rule under the
authority delegated to the Board by the
Office of Management and Budget. No
collections of information pursuant to
the Paperwork Reduction Act are
contained in the final rule.
List of Subjects in 12 CFR Part 204
Banks, banking, Reporting and
recordkeeping requirements.
Authority and Issuance
For the reasons set forth in the
preamble, the Board is amending 12
CFR part 204 as follows:

■

PART 204—RESERVE
REQUIREMENTS OF DEPOSITORY
INSTITUTIONS (REGULATION D)
1. The authority citation for part 204
continues to read as follows:

■

Authority: 12 U.S.C. 248(a), 248(c), 371a,
461, 601, 611, and 3105.

2. Amend § 204.2 by adding
paragraphs (v), (y), (z), (aa), (bb), and
(cc) to read as follows:

■

§ 204.2

*

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*

Definitions.

*

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*

*

Federal Register / Vol. 74, No. 102 / Friday, May 29, 2009 / Rules and Regulations
(v) Clearing balance means the
average balance held in an account at a
Federal Reserve Bank by an institution
over a reserve maintenance period to
satisfy its contractual clearing balance
with a Reserve Bank.
*
*
*
*
*
(y) Eligible institution means—
(1) Any depository institution as
described in § 204.1(c) of this part;
(2) Any trust company;
(3) Any corporation organized under
section 25A of the Federal Reserve Act
(12 U.S.C. 611 et seq.) or having an
agreement with the Board under section
25 of the Federal Reserve Act (12 U.S.C.
601 et seq.); and
(4) Any branch or agency of a foreign
bank (as defined in section 1(b) of the
International Banking Act of 1978, 12
U.S.C. 3101(b)).
(z) Excess balance means the average
balance held in an account at a Federal
Reserve Bank by or on behalf of an
institution over a reserve maintenance
period that exceeds the sum of the
required reserve balance and any
clearing balance.
(aa) Excess balance account means an
account at a Reserve Bank pursuant to
§ 204.10(d) of this part that is
established by one or more eligible
institutions through an agent and in
which only excess balances of the
participating eligible institutions may at
any time be maintained. An excess
balance account is not a ‘‘pass-through
account’’ for purposes of this part.
(bb) Required reserve balance means
the average balance held in an account
at a Federal Reserve Bank by or on
behalf of an institution over a reserve
maintenance period to satisfy the
reserve requirements of this part.
(cc) Targeted federal funds rate means
the federal funds rate established from
time to time by the Federal Open Market
Committee.
■ 3. Revise § 204.10 to read as follows:

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§ 204.10

Payment of interest on balances.

(a) Payment of interest. The Federal
Reserve Banks shall pay interest on
balances maintained at Federal Reserve
Banks by or on behalf of an eligible
institution as provided in this section
and under such other terms and
conditions as the Board may prescribe.
(b) Rate. Except as provided in
paragraph (c) of this section, Federal
Reserve Banks shall pay interest at the
following rates—
(1) For required reserve balances, at 1⁄4
percent;
(2) For excess balances, at 1⁄4 percent;
or
(3) For required reserve balances or
excess balances, at any other rate or

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rates as determined by the Board from
time to time.
(c) Pass-through balances. A passthrough correspondent that is an eligible
institution may pass back to its
respondent interest paid on balances
held on behalf of that respondent. In the
case of balances held by a pass-through
correspondent that is not an eligible
institution, a Reserve Bank shall pay
interest only on the required reserve
balances held on behalf of one or more
respondents, and the correspondent
shall pass back to its respondents
interest paid on balances in the
correspondent’s account. Any passing
back of interest by a correspondent to a
respondent under this subsection is not
a payment of interest on a demand
deposit for purposes of Part 217 of this
chapter (Regulation Q).
(d) Excess balance accounts. (1) A
Reserve Bank may establish an excess
balance account for eligible institutions
under the provisions of this paragraph
(d). Notwithstanding any other
provisions of this part, the excess
balances of eligible institutions in an
excess balance account represent a
liability of the Reserve Bank solely to
those participating eligible institutions.
(2) The participating eligible
institutions in an excess balance
account shall authorize another
institution to act as agent of the
participating institutions for purposes of
general account management, including
but not limited to transferring the excess
balances of participating institutions in
and out of the excess balance account.
An excess balance account must be
established at the Reserve Bank where
the agent maintains its master account,
unless otherwise determined by the
Board. The agent may not commingle its
own funds in the excess balance
account.
(3) No required reserve balances or
clearing balances may be maintained at
any time in an excess balance account,
and balances maintained in an excess
balance account will not satisfy any
institution’s reserve balance
requirement or contractual clearing
balance.
(4) An excess balance account must be
used exclusively for the purpose of
maintaining the excess balances of
participants and may not be used for
general payments or other activities.
(5) Interest shall be paid on excess
balances of eligible institutions
maintained in an excess balance
account in accordance with paragraph
(b)(2) or (b)(3) of this section.
(6) A Reserve Bank may establish
additional terms and conditions
consistent with this part with respect to
the operation of an excess balance

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25629

account, including, but not limited to,
terms of and fees for services,
conditions under which an institution
may act as agent for an account,
restrictions on the agent with respect to
account management, penalties for
noncompliance with this section or any
terms and conditions, and account
termination.
By order of the Board of Governors of the
Federal Reserve System, May 22, 2009.
Robert deV. Frierson,
Deputy Secretary of the Board.
[FR Doc. E9–12432 Filed 5–28–09; 8:45 am]
BILLING CODE 6210–01–P

FEDERAL RESERVE SYSTEM
12 CFR Parts 204 and 209
[Regulations D and I; Docket No. R–1307]

Reserve Requirements of Depository
Institutions; Issue and Cancellation of
Federal Reserve Bank Capital Stock
AGENCY: Board of Governors of the
Federal Reserve System.
ACTION: Final rule.
SUMMARY: The Board is amending
Regulation D (Reserve Requirements of
Depository Institutions) and Regulation
I (Issue and Cancellation of Federal
Reserve Bank Capital Stock) to make
two substantive changes and other
clarifying amendments. The first
substantive amendment conforms
Regulation D to Section 603 of the
Financial Services Regulatory Relief Act
of 2006 (Pub. L. 109–351, Oct. 13, 2006)
by authorizing member banks of the
Federal Reserve System to enter into
pass-through arrangements. Previously,
member banks were statutorily
prohibited from passing required
reserve balances through a
correspondent institution. The second
substantive amendment eliminates the
provision in Regulation D’s definition of
‘‘savings deposit’’ that limits certain
kinds of transfers from savings deposits
to not more than three per month. As a
result, all transfers and withdrawals
from a savings deposit that are subject
to a monthly limit will be subject to the
same limit of not more than six per
month. The remaining clarifying
amendments reorganize the provisions
relating to deposit reporting and the
calculation and maintenance of required
reserves, clarify the definition of ‘‘vault
cash,’’ and make other minor editorial
changes.
DATES: This final rule is effective July 2,
2009.
FOR FURTHER INFORMATION CONTACT:
Sophia H. Allison, Senior Counsel (202/

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